Are Active Investments Passe?

A quartet of Morningstar research analysts took to the stage at the Morningstar Investment Conference to discuss the seeming ascendency of passive investing strategies.

To the question “are we witnessing the marginalization of active management?” the four largely agreed passive investing was on the rise, and overall that’s good for investors.

“A smart investor is using both, but there is a lot to be said for keeping costs low and using passive strategies,” said Scott Burns, director of global fund research for Morningstar.

John Rekenthaler, vice president for research, agreed, but pointed out “what matters for investors is they go low-cost and long-term. You can do that with both active and passive investments. The issue isn’t as much active versus passive, it’s cheap versus expensive.”

What may stem the tide? Burns pointed out that as much as 60% of the assets managed by Vanguard, the bastion of low-cost, passively managed index funds, were actually being actively managed. (CORRECTION: A Vanguard spokesman points out the number is actually closer to 40%.) “There are all these technologies that are lowering the distribution costs and helping the active manager succeed against a passive benchmark,” he said.

Burns pointed out the Don Philips, President of Morningstar Research, did some back of the envelope calculations and found Vanguard’s actively managed fund performed better compared to the passive, simply because they were able to keep fees low.